Forex: Euro Rebound To Taper Off On Debt Fears, Rate Expectations

DailyFX

Sep. 28, 2011, 8:15 AM

The increased commitment to address the European debt crisis helped to prop up market sentiment on Wednesday, but we may see a shift in risk-taking behavior as the fundamental outlook for the world economy remains clouded with high uncertainty.

Talking Points

Euro: Germany To Increase Assistance For Greece, ECB To Ease Further

Euro: EU To Meet On Greece In October, Rate Cut On Tap

European Commission President Jose Barroso said the EU should expedite the start of the permanent bailout fund while speaking in France, and went onto say that Greece will continue to operate under the fixed-exchange rate system as the group increases its efforts to address the debt crisis. In addition, the EU announced that it will conduct additional meetings next month in order to find a credible resolution for Greece, but the renewed efforts may be too little too late as the heightening risk for contagion continues to bear down on investor confidence.

In contrast, former European Central Bank Chief Economist Otmar Issing warned that Greece will be forced out of the monetary union as the country's debt is expected to reach 160% of GDP, and we are likely to see an increased reliance on the Governing Council to address the risks for the region as European policy makers struggle to meet on common ground. According to Credit Suisse overnight index swaps, market participants are pricing a 25bp rate cut for the policy meeting on tap for the following week, and the ECB may also expand its nonstandard measures in an effort to stem the ongoing turmoil within the financial system. As the EUR/USD continues to trade below 1.3700, it seems as though the rebound from 1.3362 is losing momentum, and the exchange rate may consolidate going into the end of the week as market jitters weigh on risk-taking behavior. In turn, we may see a short-term correction pan out in the coming days, but the single-currency may fade additional headwinds over the near-term should the ECB extend its easing cycle.